This month, Euromoney seeks to debunk two of the great myths of the international financial markets. The first relates to Europe. As Euromoney went to press in late August, a trade row had erupted between the European Union and China about the import of textiles from the People’s Republic.
The interventionist leanings of the EU had persuaded its trade commissioner, Peter Mandelson, to impose a limit on the amount of textile goods that could be imported from China. What Mandelson and his advisers hadn’t reckoned with was that Chinese textiles exports to Europe were of such a magnitude that enforcing the quota would lead to shortages throughout the EU’s retail outlets.
By the end of August one option being considered was to maintain the quota system but allow some of next year’s quota to be used up this year.
This is a typical EU fudge – set a rule and, when it doesn’t quite work out as expected, obfuscate, wriggle and negotiate until no rules are broken but the situation is mended for the short term.
You might wonder what Chinese-made bras and T-shirts have got to do with global finance. Well, something similar has been happening in Europe’s bond markets for a long time, but on an vastly larger scale, and it is about time people started to consider the implications.
Ever since the Maastricht criteria were put in place for entry to the European single currency, finance ministries across the continent have been looking for ways to massage the figures for the level of debt in their economies. Those means have almost invariably been located – and readily offered by investment banks – in the capital markets.
Securitization, special purpose vehicles, off-balance-sheet funding and derivatives marshalled to disguise real levels of indebtedness. Sounds familiar? You’ve guessed it, that was Enron’s ploy.
Take Cades, an agency set up by the French government with the specific task of refinancing a portion of social security debt in the late 1990s. It was one of the first Maastricht trades. But over the years more and more financing obligations have been added until now Cades has to finance well over A100 billion of the French government’s debts – more than five times its original commitment.
Cades has become the dumping ground for debt that the French authorities want to remove from their own balance sheet, effectively hiding it. Apart from the fact that Cades, as a borrower, is well known to the public, and the French finance ministry makes no attempt to disguise its existence, is the agency’s raison d’être fundamentally different to Enron’s hidden accounts, such as Chewbacca?
Of course it’s unfair to single out France. One way or another, every major European government is up to the same tricks. Regulators and opposition politicians must know but don’t seem to care, but investors and taxpayers ought to.
The second myth relates to the US, but also to the global economy at large. Alan Greenspan is about to retire as chairman of the Federal Reserve after a 19-year stint. The eulogies have started being written. But longevity does not automatically equate with success. And, with the aim of correcting the balance, Euromoney publishes an alternative view of the Greenspan legacy.
